LCQ17: Major infrastructure projects experiencing cost overruns


Hong Kong (HKSAR) -      Following is a question by the Hon Paul Tse and a written reply by the Secretary for Development, Mr Michael Wong, in the Legislative Council today (January 31):

Question:

     Major infrastructure projects have experienced serious cost overruns one after another in recent years. After checking the relevant information over the past few years and comparing the initial cost estimates of a number of major infrastructure projects with their final or latest project costs, an economist has found that all such works projects have experienced serious cost overruns. He has also indicated that just counting the projects of Sha Tin to Central Link, the Hong Kong Section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link, the Hong Kong-Zhuhai-Macao Bridge, the Central-Wan Chai Bypass, the Expansion of Hong Kong International Airport into a Three-Runway System and the West Kowloon Cultural District, the cost overruns involved have totalled "$80 billion, if not $100 billion".

According to calculations made on the basis that the current average construction cost of a public rental housing (PRH) unit stands ataround $700,000, such a sum of cost overruns is sufficient to fund the construction of 110 000 to 140 000 PRH units. He considers that the aforesaid situation has reflected that the Government's cost estimation work is blatantly flawed, and it is therefore not surprising that members of the public have criticised that major infrastructure projects are mostly "white elephant" projects. Some members of the public have pointed out that major infrastructure projects experiencing serious cost overruns has not only undermined their confidence in the Government's management of public finances, but also become the pretext used by some Members of this Council to filibuster or procrastinate the vetting and approval of funding proposals at meetings of the Finance Committee (FC), thereby hindering the normal funding allocation procedure.

In this connection, will the Government inform this Council:

(1) whether it has assessed the reasons why a number of infrastructure projects have repeatedly experienced cost overruns in recent years, and how projects experiencing cost overruns has undermined public confidence in the Government's management of public finances and the negative impact thus caused;

(2) of the number of works projects the cost estimates of which have been reviewed by the Project Cost Management Office (PCMO) since its establishment by the Development Bureau in 2016, and the total expenditure thus reduced; whether the Government will broaden the functions of PCMO to cover the vetting and monitoring of the cost estimation work of works projects that are implemented under the concession approach; and

(3) as the aforesaid economist has pointed out that the causes for a number of major infrastructure projects experiencing cost overruns in the past might involve deliberate underestimation of the initial costs of works projects by government officials in an attempt to push up the rates of return of the works projects, thereby making it easier to obtain FC's approval for the funding proposals concerned, whether the Government has conducted/will conduct an investigation to see if there was deliberate underestimation of the costs of infrastructure projects?

Reply:

President,

     The Government has been implementing public works projects in an appropriate and orderly manner with a view to improving people's quality of living, enhancing the long-term competitiveness and promoting the economic development of Hong Kong. Our infrastructure facilities have all along been instrumental in serving the community, and more significantly in improving people's livelihood. The allegations that "infrastructure projects are mostly white elephants" are groundless.

     Notwithstanding that there have been instances of cost overruns in implementing certain mega projects in recent years due to unforeseeable circumstances, we have in general maintained good performance in taking forward projects under the Capital Works Programme.

The Finance Committee (FC) of the Legislative Council (LegCo) approved about 570 Category A works projects with a total provision of $800 billion in the past ten years. Among them, about 70 projects required application to the FC for additional funding, which totaled around $65 billion. In other words, additional funding was required in approximately 10 per cent of the projects and the amount represented some 8 per cent of the total provision.

In addition, although certain projects required additional funding owing to individual circumstances, we generally managed to complete the projects under the Capital Works Programme within the original Approved Project Estimates (APE) and even with surplus. About 850 Category A projects had the final accounts settled in the past ten years. Their original approved estimates totaled about $240 billon as compared with the total final expenditure of about $210 billion.

Though some projects needed to apply for additional provisions from the FC, the surplus from other projects were not only able to offset the cost overruns but also managed to leave behind a balance of $30 billion. In short, the total expenditures of these projects at final settlement accounted for only about 85 per cent of their original APE.
 
     There are news reports that interpreted a funding application to the FC as "cost overrun", when the amount of the application is higher than the preliminary estimate at the project initiation. We have to point out that it normally takes several years to well over ten years for a project to submit funding application after its initiation.

Project estimate is subject to updates for reasons of various requirements, fluctuations in the external economic environment, the changes of construction costs and prices as a result of inflation, detailed refinements to design and changes in project requirements as a result of consultation, etc ., before it can be submitted for the LegCo's funding approval. Such situation should be differentiated from one where additional provisions are required after the approval of the project estimate.

     We understand the public concern over the performance in project estimation and cost control. The Development Bureau established the Project Cost Management Office (PCMO) in June 2016 to enhance the cost management of public works projects, uplift the cost-effectiveness of the projects and ensure the effective use of public funds.

One of the main tasks of the PCMO is to enhance the project management standard for public works projects, including the performance in project cost estimation. The PCMO is working on ways to enhance the methodologies for formulation of project cost estimation.

     My reply to the three parts of the Hon Tse's question is as follows:

(1) As mentioned above, we have maintained consistently good performance in cost estimation for projects under the Capital Works Programme as a whole. Only some individual mega projects needed to apply for additional provisions due to unforeseeable circumstances.

     In 'Global Construction Survey 2017 - Make it, or break it", published by KPMG in October last year, Professor Bent Flyvbjerg of the University of Oxford pointed out that Hong Kong and the Netherlands are better than other districts in the performance of project cost estimation according to the findings of his study covering over 100 districts.

     Nevertheless, the Government will continue to enhance the cost estimation of public works projects in order to maintain the public confidence in the Government's management of public finance.

(2) Since its establishment in June 2016, the PCMO has reviewed the cost estimates of over 130 public works projects at the planning and design stage and achieved savings exceeding $25 billion.

     Currently, the PCMO's effort on cost control has covered all capital works projects.

Where necessary, the PCMO will assist in enhancing the performance in cost management of new railway projects.
 
(3) As in (1) above, the performance of Hong Kong in project cost estimation has been surpassing other districts. Moreover, project estimates are prepared by works departments and the professionals of their consultants based on established mechanisms, objective data and professional analyses. Project estimates cannot be adjusted arbitrarily.

Besides, all works departments have set up dedicated committees in accordance with relevant guidelines to review and monitor the estimates of the public works projects under their purview. Thus, in no circumstances could a project cost be deliberately underestimated. Nevertheless, we will continue to enhance the methodologies for formulation of project cost estimation for uplifting cost estimation performance of public works projects.



Published on: 2018-01-31

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